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1st Rate Increase Since 2018, 10 year T spikes to 2.25%

Today’s Federal Reserve meeting and accompanying announcement was expected – the first increase in 4 years of the Fed Funds rate. The quarter point increase today will be followed by six more increases throughout 2022 according to the accompanying statement and “dot plots”. That would bring the overnight rate and the index for floating rate loans up to 1.75 – 2.00% by year end. Stocks rallied on the news as markets welcome some action on inflation. The Fed is searching for the (elusive) “soft landing” whereby rate increases cool inflation without choking growth. It is looking like a tough challenge with little historical precedent: a supply shock, high commodity prices, wage inflation, pent up demand following massive stimulus. The prospect of recession or “stagflation” (low growth, rising prices) is feared as a possible outcome. The Fed committee also predicted three rate increases in 2023 to end up at the so-called “neutral rate” (or “terminal rate”) now pegged at around 2.50%. The 10 year T hit 2.25% today, a high last reached in May 2019. Look for SOFR (the leading floating rate index) to increase, today the 30 day SOFR is at 0.33% and is expected to increase in nearly lock step with the Fed Funds rate. The Ukraine invasion and global uncertainty continue to contribute to volatility in credit spreads. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners